For the past year, Wall Street firms have been under the gun for long-standing conflicts of interest between their sell-side analysts and investment bankers. Regulators, Congress, and irate investors have all expressed concern that purportedly objective research reports merely serve to further lucrative banking relationships.
Well, now add the AFL-CIO to that list. The umbrella group for some of the nation's largest unions, with 13 million members and $400 billion invested in union-sponsored pension plans, has filed a shareholder resolution with Goldman Sachs Group Inc. aimed at rebuilding the so-called Chinese wall between analyst and banking operations. J.P. Morgan Chase & Co. may also be targeted by the union for a shareholder vote in the spring.
"It is clear that investors are not being well served by the [Securities Industry Association] guidelines on analyst independence," says Damon Silvers, associate general counsel of the AFL-CIO. "Our philosophy is that long-term value is created by firms that behave ethically. Conflicted analysis is not good for a business whose credibility is its core asset."
The AFL-CIO resolution calls for Goldman to bar its analysts from participating in the sales efforts of underwriters, and to stop linking analysts' pay to the performance of the investment-banking group. It also recommends that the securities firm prevent its analysts from owning stock in the companies it covers.
The AFL-CIO opted not to file a similar resolution against Merrill Lynch & Co. after a series of high-level meetings about the firm's current efforts to address the union's concerns. Silvers, who took part in the meetings with Merrill executives, says the firm is "not perfect, but at the vanguard" on the issue. For instance, the head of research reports directly to the CEO, not through the banking department or some other intermediary; the bonus pool for analysts is drawn from the overall corporate performance; and analysts are prohibited from acquiring pre-initial public offering shares.
The AFL-CIO has decided not to pursue two other Wall Street firms that have also been the focus of intense scrutiny. One, Morgan Stanley, didn't get the chance to file a shareholder resolution to address the conflict, because its deadline for filing predated the union's decision to act. And Credit Suisse First Boston, which has a foreign parent, is not subject to the same kind of shareholder activism.